John Lewis is the Senior Portfolio Manager at Dorsey Wright. Since joining Dorsey Wright in 2002, Mr. Lewis has developed strategies for the firm’s Systematic series of separate accounts, the Technical Leaders Index methodology, global asset allocation strategies, and multiple series of UITs. His work is technically driven and focuses on relative strength and momentum as the main factors in the investment process.
Q: What is the role that computer programming plays in your portfolio management responsibilities?
A: Computers play an integral part in designing new strategies and maintaining existing ones. We have designed a ton of different investment processes over the years and we have done so much testing that we have a pretty good idea of what will and won’t work and how to integrate that into a portfolio. That knowledge base is really invaluable and is really the most important part of the process. But we can harness the power of the computer to validate and stress test all of those ideas. We are able to run tens of thousands of tests if we need to in order to make sure our ideas have merit. On an ongoing basis, our strategies are designed to be systematic so using a computer to do all of the calculations for us is a huge time saver and allows us to run a large number of strategies with minimal human capital.
Q: How did you develop those computer programming skills?
A: This story is 100% true. I was working in San Diego and part of my job function required me to stay later than everyone else to get data loaded into our systems for the next trading. All of my friends on the floor were leaving early (remember, the market closes at 1:00 on the West Coast) to go to the beach, golfing, or whatever, and it was always difficult for me to cut out a little early. When faced with such a large problem it often takes drastic measures to solve it. So I taught myself how to program visual basic and I set up a bunch of Excel macros to run stuff while I was out of the office. It would up working really well so I just kept going and figuring stuff out along the way. Computer programming has always been pretty easy for me, and I have had any formal training or anything like that. The result of that decision to teach myself how to program in order to leave work early was the launching pad to what we are doing today. However, my golf game is still terrible and my beach body has rapidly become something that shouldn’t be allowed on the beach.
Q: What led to the development of the family of Systematic Relative Strength portfolios (separately managed accounts)?
A: We did a review of our portfolios and tried to figure out what was working and what wasn’t. As we dug deeper into the data it became clear that relative strength was really driving the performance and not any of the other “stuff” that went into the decision making. Our testing process actually led us down a totally different path than how most things get tested. We started with a bunch of inputs and kept whittling down the list. Instead of finding something that worked and trying to add additional things to the model, we kept asking ourselves if we could accomplish the same goal with fewer things in the model. The more streamlined you make a model the more robust it should be over time. There are fewer things to break. Whenever we talk about the process for our portfolios, people seem to think we aren’t as sophisticated as other managers who use a bunch of different factors and constantly reoptimize them. But the fact of the matter is that we have computers too and we could do that if we wanted to. There is a very elegant simplicity to how we set up our models, and sometimes that is actually harder to accomplish than making something that is very complex.
Q: Many in the industry argue for multi-factor investment models. The family of Systematic Relative Strength portfolios employs just one input—relative strength. Why?
A: Relative Strength (momentum) is one of the premier investment factors out there. Our expertise lies in building and implementing investment processes using momentum. That is really where our edge is so we try to exploit that as best as we can. Over the years we have gained a lot of experience in using other factors along with momentum so you have probably seen us write about other factors, but they are still centered around relative strength. Momentum is a great factor, it is very objective, and it lends itself very well to the type of systematic models we are good at building.
Q: Of the 7 strategies in the family of Systematic Relative Strength portfolios, one can’t help but take note of the International portfolio. Is there anything unique about the way that this strategy is managed that may have contributed to its success?
A: The International strategy uses a universe of ADR’s. It is one of our smaller strategies in terms of assets under management, but one of our best performers. The ADR universe is very unique. There is a ton of dispersion in that universe meaning there are a lot of stocks that have tremendous performance and others that have dreadful performance. That is great for any relative strength strategy. In addition, it is a very flexible strategy so we can swing the allocation between developed and emerging whenever we need to. The ADR strategy is really unique and now that we have a 10 year live track record under our belt I would not be surprised to see interest in that strategy pick up dramatically in the coming years.
Q: What is the trade-off investors face when they choose between our Aggressive, Core, and Growth portfolios, all of which invest in U.S. mid and large cap equities?
A: It is a classic risk and return tradeoff. The Aggressive strategy is the most aggressive application of momentum. That means it has more turnover, more volatility, and over long periods of time higher potential return. However, it can go quite a while underperforming the other strategies if we aren’t in a good momentum market. The difference between Core and Growth really comes down to the cash component. We can raise cash in the Growth portfolio if necessary. Obviously, that is very beneficial in down markets, but can result in lagging performance in up markets. All three of those strategies have done well despite not having a real good momentum environment for a while.
Q: Our most popular separately managed account by assets continues to be our Global Macro portfolio. Why do you think this portfolio has seen so much demand?
Global Macro is a very flexible global tactical asset allocation strategy. This appeals to a lot of investors because it is so difficult to determine where the best returns will be in the future. A strategy like global macro just goes to where the momentum is and can invest in a number of different asset classes. If equities are doing well, we are overweight there. If things shift and commodities start doing well the portfolio will shift along with it. What is also appealing is the disciplined application of the process. Making global trend predictions is darn near impossible. We know that so we don’t even try to do it. We are wrong a lot, but the goal is not to stay wrong. We don’t paint ourselves into a corner and hold on to a prediction we made. We just position the portfolio to wherever the strength is and make changes when that strength changes. That is a very appealing way to capitalize on global trends in a very uncertain environment.
To receive the brochure for our Systematic Relative Strength portfolios, please e-mail firstname.lastname@example.org or call 626-535-0630.
The relative strength strategy is NOT a guarantee. There may be times where all investments and strategies are unfavorable and depreciate in value.